Working Paper: NBER ID: w18921
Authors: Daron Acemoglu; James A. Robinson
Abstract: The standard approach to policy-making and advice in economics implicitly or explicitly ignores politics and political economy, and maintains that if possible, any market failure should be rapidly removed. This essay explains why this conclusion may be incorrect; because it ignores politics, this approach is oblivious to the impact of the removal of market failures on future political equilibria and economic efficiency, which can be deleterious. We first outline a simple framework for the study of the impact of current economic policies on future political equilibria— and indirectly on future economic outcomes. We then illustrate the mechanisms through which such impacts might operate using a series of examples. The main message is that sound economic policy should be based on a careful analysis of political economy and should factor in its influence on future political equilibria.
Keywords: political economy; market failures; policy advice
JEL Codes: O20; P16; P48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| removal of market failures (union power) (J58) | reduction in political counterweights (union influence) (J58) |
| reducing the market power of unions (J58) | deunionization (J51) |
| deunionization (J51) | shift in political power towards established business interests (P16) |
| policies enhancing economic efficiency (F68) | increase in inequality (D31) |
| increase in inequality (D31) | counterproductive political implications (D72) |
| failing to consider political implications of economic reforms (E65) | adverse outcomes (civil unrest or authoritarianism) (O17) |